WSJ. Russia's Devaluation of Ruble Hammers Nation's Debt Market
August 18, 1998
By MITCHELL PACELLE, GREGORY ZUCKERMAN and MICHAEL R.
SESIT
Staff Reporters of THE WALL STREET JOURNAL
Until recently, global investors regarded the Russian debt market as a safer
bet than Russia's volatile stock market. No more.
Monday's ruble devaluation hammered Russia's already-slumping debt
markets, hurting global "macro" investors such as Julian Robertson of Tiger
Management and Leon Cooperman of Omega Advisors, as well as mutual
funds that focus on emerging-market debt and a handful of hedge funds
that invest exclusively in Russian debt.
"There are more questions than answers at
this point," said Joseph Strubel, manager of
MFK Renaissance Asset Management's $65
million Russian Bond Fund. "Obviously, with
what's happened in the last few weeks, we'd
be down pretty significantly for the year."
A spokesman for Tiger declined to comment
on the size of the firm's Russian bond holdings
but remarked of the pending debt
restructuring: "Tiger has supported Russia in
the past, when the country needed capital . . ..
Any punitive restructuring would send the wrong signal to investors and
would be hurtful, not just to Russia, but to other emerging-market nations,
particularly in Southeast Asia and Latin America."
Mr. Cooperman of Omega declined to comment on his firm's holdings, but
one person familiar with the hedge fund said the ruble-denominated debt
accounted for less than 3% of its assets.
Luring Other Fund Managers
It isn't just risk-courting hedge funds that played this market. Russian debt,
especially the dollar-denominated Eurobond debt, attracted such major
mutual fund and pension-fund managers as Alliance Capital Management,
Fidelity Investments, Scudder Kemper Investments, Morgan Stanley
Asset Management and J.P. Morgan Investment Management, according
to Morningstar Inc., a Chicago fund research firm. Morgan Stanley
Emerging Market Debt Fund, for example, was 27% invested in Russian
bonds, as of June 30, Morningstar said. It was down 15.3% as of Friday,
Morningstar added.
Scudder's Emerging Markets Income fund, which was 17% invested in
Russian bonds as of March 31, was down 15% through Friday, and
Alliance's Global Dollar Government fund, 16% in Russian bonds as of
March, was down 14%, Morningstar said.
"The appeal for all these investors has been the highest yielding,
dollar-denominated debt of any country rated just below investment
grade," said Loren Bough, head of trading at Brunswick Warburg, a
brokerage house in Moscow. "On a ratings-comparable basis, the yields
Russia offered were always significantly higher than other issuers of dollar
debt."
Because Monday's Russian government actions left few buyers in the
Russian debt market, it was nearly impossible for investors to place a
current value on their holdings. "There's been so much pain already that
investors are just waiting to see what happens," said James Conklin, an
emerging-markets currency strategist at Lehman Brothers.
Russian-Bond Situation
Russian bonds had already suffered steep losses before the devaluation.
Russian-bond prices are now down 54.2% for the year on a total-return
basis, which includes coupon payments, according to J.P. Morgan
Emerging Markets Bond Index Plus. Russian treasury bills denominated in
rubles, known as GKOs, are down even more.
But the ruble's devaluation threw another variable into an
already-unfavorable investment outlook. The Russian government said it
intends to restructure all domestic debt maturing before Dec. 31, 1999.
Most American and European investors had hedged their
ruble-denominated bonds with forward foreign-currency exchange
contracts. These contracts are supposed to convert the bond payoffs from
rubles to dollars at a guaranteed rate, in most cases, of 6.25 to 6.5 rubles
per dollar. But the devaluation left many investors convinced that Russia's
local banks would be unable to honor those exchange rates.
"Very few managers went into the debt without a currency hedge," said
Charles Gradante, managing principal of Hennessee Hedge Fund Advisory
Group. "The issue now is, will the Russian central bank honor the
foreign-currency forward contracts. I don't think the central bank has
enough dollars to honor them."
Change in Ownership
There is about $62 billion of ruble-denominated debt outstanding. Russian
investors own about $20 billion, Russian state and central banks hold an
additional $27 billion, and nonresident investors have $10 billion to $15
billion, bond traders estimate. Bankers figure that at one point, foreign
investors owned roughly 30% of the ruble debt outstanding, but the Asian
financial crisis forced many emerging-market institutions out of the market,
and Russia's financial instability persuaded some American and European
investors to bail out.
For large "macro" hedge funds, which make large directional bets on
currencies, stocks and bonds, Russian bonds offered an attractive
investment. There were Russian treasury bonds, corporate bonds and
municipal bonds, denominated in rubles, that, depending on when they
were purchased, boasted annual returns of as much as 100% and more.
Other bonds were denominated in U.S. dollars and underwritten by such
firms as Goldman, Sachs & Co.
Among the large hedge funds that invested in the Russian debt were
Omega, Tiger, Appaloosa Investment and investor George Soros's
Quantum funds, according to hedge-fund investors and consultants.
An Appaloosa executive declined to comment, and a spokesman for Mr.
Soros didn't return calls seeking comment. Mr. Soros had urged a
devaluation in a letter last week to London's Financial Times.
Some hedge funds that specialize in the emerging-market debt also stood
to be hurt more by the market turmoil. They include MFK Renaissance,
which has offices in Moscow, New York and London; New York-based
Croesus Capital Management, and Tradewinds Emerging Debt Fund,
based in Mill Valley, Calif.
Guy Elliott, chairman of Croesus, said that only 7% of the fund's assets
were in Russian debt, and much of that dollar-denominated debt was
purchased after prices had plunged. Tradewinds didn't return a phone call
seeking comment.
Various dollar-denominated Eurobonds that Russia has sold during the
past 10 weeks have plunged in value recently. The $1.25 billion, five-year
offering underwritten by Goldman Sachs on June 3 has fallen to 51% of
face value of the bonds from 98.8%. The $2.5 billion of 30-year bonds
underwritten by Deutsche Bank AG and J.P. Morgan Securities Ltd. on
June 18 have fallen to 49.5% from 98.4%.
"All of those have collapsed with the market over the last couple of
weeks," said Peter Halloran, head of Pharos Capital Management in
Moscow. "The market has proved most people wrong who have invested
recently."
Return to top of page | Format for printing
Copyright c 1998 Dow Jones & Company, Inc. All Rights Reserved.
|
